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Third Point turns up pressure on Yahoo!

by Richard Morgan | Published September 9, 2011 at 8:41 AM

For an investor in Yahoo! Inc. that professes to be "focused on the future," Third Point LLC spent ample time on the past Thursday in a blistering letter to the Sunnyvale, Calif.-based company that only two days earlier fired Carol Bartz as its CEO.

Third Point, a New York hedge fund run by Daniel S. Loeb, isn't alone in wondering "why this decision was so long in coming, given her abysmal performance over the last two-and-a-half years." Nor is it the only Yahoo! investor still irked by the "gross error in turning down the $31 per share" that Microsoft Corp. offered for the company three years ago.

The hedge fund also regurgitated criticism about the "debacle" over Alipay, the Hong King-based transfer-of-payment service that Yahoo! previously owned with Asian partners Alibaba Group Holding Ltd. and SoftBank Corp. And, despite applauding the most recent rotation in the executive suite, Third Point nonetheless took issue with management churn: Bartz's successor, its letter to Yahoo!'s board complained in italics, is the "fourth CEO in four years."

Likely to be of most interest to fellow investors, however, was Third Point's sum-of-parts analysis. This exercise moved the hedge fund, whose 5.1% Yahoo! stake makes it the third-largest outside shareholder, to place an intrinsic value on Yahoo! stock in excess of $20 per share.

That's nearly 50% more than the stock's close on Tuesday, at $13.61 per share, just before the company went public with Bartz's ouster. What's more, after discounting Tuesday's closing price to reflect the company's other parts, Third Point concluded that "core Yahoo!" trades at a mere 2.2 times projected 2012 Ebitda.

The sums removed from the stock price to reveal the value attributed to core Yahoo! were: $2.49 per share to discount, on a tax-adjusted basis, the company's net cash; $3.10 per share to account for the after-tax worth of Yahoo! Japan; and $5.24 per share in an after-tax appreciation of Yahoo!'s 43% stake in Alibaba Group. These calculations, Third Point concluded, left the market valuing core Yahoo! at just $2.78 per share -- or the previously mentioned 2.2 times projected 2012 Ebitda.

"With more effective and focused management," the hedge fund then asserted, "one could realistically envision a re-rating to at least 7.0 times 2012 Ebitda, driving a target of over $19.00 per share. When coupled with tax efficient outcomes for its Asian assets, an additional $3.00-4.00 per share stands to be realized."

But those value increases are likely to remain unrealized, Third Point continued, without the resignation of at least four Yahoo! directors, including chairman Roy Bostock, who have tolerated what the hedge fund termed a "woeful performance." Then, ever helpful, Third Point let it be known it had already "distilled an All-Star team of potential director candidates."

The letter ended as many of its type do, with threats of an alternate slate at Yahoo!'s next annual meeting. "Such proxy disputes are burdensome, and we sincerely hope that one will not be necessary here," the letter acknowledged. "Shareholders have already suffered enough."

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Tags: Daniel S. Loeb | hedge fund | Microsoft Corp. | Third Point LLC | Yahoo! Inc.

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Third Point turns up pressure on Yahoo!

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